I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

The bearish case is simple: Fairpoint is a classic melting ice cube, a landline phone company that still gets nearly half its revenue from voice traffic and has seen sales decline steadily since it emerged from bankruptcy in 2009, loaded with expensive union contracts and $1 billion in debt. It helps that Fairpoint doesn’t pay a dividend, making it less costly for hedge funds to short (short sellers must pay dividends on shares they borrow).

That’s made Fairpoint popular with hedge funds looking to short faltering telecom companies to balance against aggressive bets on growing ones. Fairpoint’s short interest stands at 4.5 million shares, down a bit from a high of 5.2 million last June, but still representing 41 days to clear at current trading volume.

“Given that this is in the telecom space and the company doesn’t pay a dividend, Fairpoint is a pretty easy name to short,” said Steven Azarbad with Maglan Capital, a small hedge fund that has acquired about 1.8 million shares or 6% in a bet the shorts are wrong.

The bullish case is more complex. Yes, Fairpoint is still laboring under nearly $1 billion in debt left over from a spectacularly ill-timed $2.4 billion purchase of Verizon’s rural landline operations in 2008. But it just completed a refinancing that pushes out maturities until 2019 and loosened covenants so it could conceivably pay dividends this year.

The company also has invested hundreds of millions of dollars in fiber-optic communications to provide broadband service to business customers, Azarbad said, and that investment is showing the first signs of paying off while capital expenditures tail off. Fairpoint spent $176 million on capex in 2011, $145 million last year, and spending should decline to about $100 million a year by 2014, he said.

At the same time Fairpoint, under Chief Executive Paul Sunu and Tony Tomae, recruited last year as chief revenue officer, should see rising revenue from higher-margin customers like hospitals and colleges and cellphone towers that require high-speed broadband communications. Stifel Nicholas, in a recent report, also projected that the business side will stop contracting and start growing by the middle of next year, big news in an industry where landline customers are still dropping off the network like leaves in the fall. (Stifel maintains a “hold” on the stock until the company straightens out other issues including looming union contract renewals.)

Maglan got its first shares by acquiring Fairpoint debt while the company was still in bankruptcy, then bought a lot more when the stock fell from the mid-20s to below 4 in 2011.

“We believed the company was not going bankrupt,” said Azarbad, whose other loan-to-own positions include a large stake in MGM Studios. “If it wasn’t for the shorts I would not have been able to buy it this cheap.”

Sunu has taken firm steps to improve the company’s finances, including laying off 500 workers and reducing overhead by $50 million to $60 million a year, Azarbad said. He thinks Fairpoint can generate $80 million in free cash flow this year, after all necessary expenses, which at 7 times would make Fairpoint worth $20 a share, more than double its current price.

The company still faces hurdles. It offloaded its retiree pension and healthcare obligations to Verizon when it bought the business but still has more than 2,000 union employees with numerous collective bargaining agreements, and underfunded pensions for current employees. Luckily, a change in federal law reduces Fairpoint’s annual cost of servicing the pensions to about $6 million this year from $20 million in 2012. And the company is renegotiating union contracts at a time when telephone workers are still smarting from concessions they were forced to accept at Verizon last year.

If the company negotiates favorable terms next year, Azarbad said, “the company should be sold.”

Meanwhile, the short-sellers hang on in the belief Fairpoint stock will go the other direction.

“Their only hope is this thing goes belly up,” said Azarbad, who of course has a lot riding on the opposite scenario. “How you go out and cover 4.5 million shares when this thing trades less than 100,000 a day? That’s a tough position to be in.”

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it must be tough laying cable in rural places where people are spread out over a large area. That means that each mile of cable services only few households. This is why densely populated countries like Japan and Korea have much faster broadband than is available in US. Sparsely populated area means that there are fewer economies of scale when it comes to infrastructure.

That is not to say that Fairpoint will not be profitable. More than just household phones, having a cable in the ground is needed for all kinds of communication devices including cellphones. I wonder who is their competition when it comes to actual data network.

My questions exactly. The bull case is that there are enough big commercial customers in these markets, and broadband penetration is so low, that the numbers will look good regardless. The fiber’s paid for.

Fairpoint was doomed from the beginning. They were Not allowed to offer a ‘bundle’ when other companies were and are. Part of their purchase deal was that they were going to hire 600 new workers. As soon as the sale went through, every single day Fairpoint sent out an e-mail welcoming the New VP of such & such department. Every single day. They were Not the right company to purchase Verizon. They seriously did not have enough Business experience like a Big Company like Verizon had. They bit off way more than they could chew. The Customers are paying for it now and the Company could Not Care Less. Their Primary goal is to break the Union and they are spending Millions of dollars TRYING to do it. The Customers are paying the price. There have been major complaints about NON Repair Service. They are Beyond Backed up. They had a help wanted ad offering experienced techs (they already have experienced techs) 3-4K per Week!! How is That smart?? The scabs they have are Not doing the work they are being paid to do and Many left after the First Storm. There are plenty of pictures of them working on the Wrong Cables and in the Wrong Manholes. They have been reported the the PUC Many times for Lack of Safety. The Public will end up paying for that too… THEY did Not negotiate. THEY gave One proposal and Walked. They did the same recently with a mediator in Washington DC. The Union offered TWO different Proposals saving the Company Millions of dollars and are still waiting to Negotiate. They can’t do that when the Company simply refuses to.